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241ASEAN+3 Information on Transaction Flows and Settlement Infrastructures ▌Part 2: Country Reports

Thailand(TH)

Bond Market InfrastructureOverview of Bond Market

Bonds issued in Thailand can be divided into three major components: government debt securities, corporate debt securities, and foreign bonds. This report mainly focuses on government bonds and corporate bonds.

According to the Asian Development Bank’s (ADB) AsianBondsOnline, the amount of local currency (LCY) government bonds outstanding in Thailand at the end of 1Q13 was USD231.66 billion, while corporate bonds reached USD62.80 billion.

The Thai government and corporate bond markets comprise the over-the-counter (OTC) market and the exchange market. In order to support the development of Thai, and subsequently Asian, bond markets, the Stock Exchange of Thailand (SET) launched a new division, Bond Electronic Exchange (BEX), on 26 November 2003. Prior to BEX, bonds were traded only in the OTC market where the players are mainly institutional investors. Small investors were unable to get into the OTC market due to its size and ambiguity, or simply due to a lack of information. However, even after the inauguration of BEX, over 95% of bond trading is still conducted through telephone or in the OTC market, while less than 5% is conducted

through BEX’s systems, the Fixed-Income and Related Securities Trading System (FIRSTS) and Automatic Order Matching (AOM). Dealers, which are financial institutions holding debt securities licenses granted by the Securities and Exchange Commission (SEC), are required to report all bond transactions to the Thai Bond Market Association (BMA), which monitors, compiles, and disseminates prices to the public at the end of day. Prices disseminated by BMA are used as market reference. Investors in the bond market are mainly institutions such as banks, mutual funds, provident funds, government pension funds, and insurance companies. Government bonds are the most actively traded securities, accounting for approximately 50% of total trade in December 2010.

Parties report trade transactions to BMA with traded data entered into Post-Trade Integration (PTI) and settled using the PTI, which is the book-entry system of bonds in Thailand. PTI is owned and operated by the Stock Exchange of Thailand (SET) and shared by Thailand Clearing House (TCH) and Thailand Securities Depository (TSD), which are subsidiaries of SET. Cash settlement is effected through Bank of Thailand Automated High-Value Transfer Network (BAHTNET), which is a Real-Time Gross Settlement (RTGS) system owned, operated, and regulated by Bank of Thailand (BOT).

242 ASEAN+3 Information on Transaction Flows and Settlement Infrastructures ▌Part 2: Country Reports

Please refer to Part 3 TH01 (Government Bond Market Infrastructure Diagram) and Part 3 TH02 (Corporate Bond Market Infrastructure Diagram).

Description of Related Organizations

Ministry of Finance (MOF) MOF is the pre-eminent regulator and oversees financial and capital markets in Thailand (Figure TH01). The activities of Bank of Thailand (BOT) and SEC are overseen by MOF.

Securities and Exchange Commission (SEC) SEC was established under the Securities and Exchange Act (SEC Act) B.E. 2535 (1992) on 16 May 1992. The SEC Act B.E. 2535 (1992) was amended by SEC Act B.E. 2551 (2008), which became effective 5 March 2008. The SEC’s objectives are to supervise and develop the primary and secondary capital markets, as well as financial and securities market participants and institutions. Its primary roles are to formulate policies, rules, and regulations regarding the supervision, promotion, and development of securities businesses, as well as other activities pertaining to securities business.

Bank of Thailand (BOT)BOT was first set up as the Thai National Banking Bureau. The Bank of Thailand Act was promulgated on 28 April 1942, vesting upon BOT responsibility for all central banking functions. BOT started operations on 10 December 1942. It has developed an electronic, large-value fund transfer system, known as BAHTNET. It is designed to mitigate risk in payment systems to facilitate settlement in an effective, secured, and timely manner on an RTGS basis since 24 May 1995.

Thailand Securities Depository Co., Ltd. (TSD)TSD is a subsidiary of SET established on 16 November 1994. TSD is the sole central securities depository in Thailand using a scripless system. The services provided by TSD are securities deposit, withdrawal, transfer, pledge, and revocation for all government and state-owned enterprise bonds. TSD is also responsible for managing foreign holdings of securities traded on the main board and foreign board of SET in compliance with related rules and regulations.

Thailand Clearing House Co., Ltd. (TCH)TCH, a subsidiary of SET, was established on 9 August 2004 with registered capital of THB100 million. During 2004–09, TCH acted as a clearinghouse for derivatives traded on the Thailand Future Exchange (TFEX). To segregate risk associated with its clearinghouse role from its depository functions, TSD, which had acted as a clearinghouse for equities and bonds since 1 January 1995, transferred clearing and settlement functions for equities and bonds to TCH in 2010. Thus, TCH became the integrated clearinghouse for all financial products. TCH is governed by the Securities and Exchange Act B.E. 2535 (1992) for equities and bonds, and the Derivatives Act B.E. 2546 (2003) for derivatives. It is under the supervision of SEC.

Bond Electronic Exchange (BEX)The Bond Electronic Exchange (BEX) is a subsidiary of SET and was launched on 26 November 2003. BEX’s main role is to support the secondary market for bond trading. As a majority of bond trading occurs in the OTC market, BEX’s objective is to expand bond activities to individual investors.

Thai Bond Market Association (BMA)BMA is a securities business association formed under the Securities and Exchange Commission Act B.E. 2535. Its main purposes are to be a self-regulatory organization (SRO) to promote the fair and efficient operation of the bond market, and to serve as an information center for the Thai bond market. As a pricing agency, BMA provides Thai bond prices to Bloomberg and Reuters; in return, it receives trade details via Bloomberg’s FIRST online capture. BOT stipulates that every bond dealer has to be BMA member.

Overview of Government Bonds

Trading

OTC TradingAs mentioned above, most government bond trades take place in the OTC market, where quotes are typically obtained directly from


money brokers and dealers over the phone. An agreement concluded over the telephone is then followed up with a confirmation order in writing. Dealers have to report trade details to BMA, as the pricing authority, within 30 minutes. BMA publishes trade reports upon receipt for government securities and twice daily for corporate bond trades.

Exchange TradingThe exchange market for government bonds in Thailand is owned and operated by BEX. BEX was established to provide investors with additional investment instruments. In addition to better access to information for investors, BEX also provides investors with an easy way to conduct trading transactions. BEX enhances the bond’s secondary market. Prior to BEX, bonds were traded on the OTC market, which was mainly the institutional investor’s arena. Small investors

were unable to get into that particular market due to its size and ambiguity, or simply due to a lack of information. In order to attract bond activities in both retail and wholesale markets, BEX has been granted approval from SET’s committee to include both government issues and corporate issues in its exchange.

BEX is currently working under the trade-by-price method. However, the committed price is converted into an indicative yield to assist in decision making. The commission fee associated with bond trading required by brokerage companies is not fixed and subject to negotiation between investors and their respective brokers. Dealers have to report trades to BMA within 30 minutes in a similar fashion as the OTC market.

BEX provides two independent trading systems for institutional investors, including their dealers

Figure TH01: Regulatory Framework of the Capital Market

Source: Stock Exchange of Thailand (SET).


and retail investors. The system for institutional investors is called FIRSTS, which began its trading service on 1 March 2006. It was developed to serve certain groups of users comprising bond dealers, institutional investors, brokers, and underwriters of the investment units. BEX is also used for retail investors. It works either through the Automatic Order Matching (AOM) or Put-Through (PT) methods. Trading values over THB10 million are undertaken using the PT method where the counterparties negotiate the deal off-exchange. Once it is concluded, the sell side initiates the PT transaction in the system which then needs the buy sides to approve it. An investor can place an order through a member-broker of SET. Brokers enter orders into BEX’s trading platform. If the bid or offer price and volume can be matched, the orders are matched automatically. At present, there are 12 active local brokers that provide brokerage services for BEX’s bond trading.

Clearing and Central CounterpartyClearing and Central Counterparty for the OTC Market

There is no clearing and central counterparty (CCP) in the OTC market.

CCP in the Exchange MarketTCH acts as CCP for clearing and settlement of all listed fixed-income instruments in BEX. TCH guarantees the performance of payment and securities delivery of trading transactions on exchanges similar to those in SET and TFEX (Figure TH02).

The Post Trade Integration System (PTI) is a project of TSD to integrate all existing system

Figure TH02: Role of TCH

Clearing Houses

Buying ClearingMember

SellingClearing Member

Buying Broker Selling Broker

Novation

BuyingSelling

Buying Client Selling Client

EXCHANGES

DVP = delivery versus payment, RVP = receive versus payment, RTGS = real-time gross settlement.Source: Stock Exchange of Thailand (SET).


Figure TH03: Process for Gross Settlement for DVP

functions and enhance full back-office services for greater efficiency. The establishment of PTI paves the way toward shortening the settlement cycle and STP initiatives, as well as cross-border transactions and multi-instruments and -markets. The settlement process of scripless government bonds traded via BEX is similar to that of equities as both are settled through PTI on a net clearing basis.

Bond Settlement

Bonds are settled via PTI on a RTGS basis. The buy side and sell side send settlement instructions to PTI. Once they are matched, TSD withholds the bonds from the sell side’s account. TSD also sends settlement instruction to BOT to settle cash. After cash settlement is completed, TSD transfers the bond from the sell side’s account to the buy side’s account.

PTI as a core system combines settlement, depository, and registration functions and features. PTI allows for STP, connects with BAHTNET, and includes FOP transactions. PTI’s messaging is based on Society for Worldwide

Interbank Financial Telecommunication (SWIFT) messages. PTI uses the International Securities Identification Number (ISIN) and Business Identifier Code (BIC), but a converter exists for local codes. Participants can utilize web-based capture, and uploading is possible. Each market participant can connect to a PTI screen. Although PTI is now a standalone system, with no interface with market participants’ systems, TSD has plans to introduce interface connectivity with market participants to enhance the STP process.

Cash Settlement

Cash settlement of government bonds relies on BAHTNET, an irrevocable funds transfer system that operates on an RTGS basis. BAHTNET is linked with TSD’s system to facilitate delivery-versus-payment (DVP) for government securities. Intraday Liquidity Facility (ILF), which provides intraday overdraft, is available for BAHTNET members under BOT supervision. BAHTNET also provides a queuing mechanism and gridlock resolution system to provide adequate liquidity for cash settlement (Figure TH03).


As a high-value payment system, BAHTNET has implemented a sufficient level of security measures such as digital signature based on private keys and smart cards to secure integrity, confidentiality, authentication, and non-repudiation (including audit trail). Regarding foreign exchange (FX) controls, non-residents can open two types of baht accounts with commercial banks: a Non-Resident Baht Account for Securities (NRBS) and a Non-Resident Baht Account (NRBA). NRBS must be used for investment in securities and other financial instruments in Thailand (e.g., equity instruments, debt instruments, unit trusts, and exchange-traded derivatives), as well as any payments relating to such investments (e.g., tax payment relating to securities investment, brokerage fee, and custodian fee). NRBA is for general purposes other than those of NRBS. Outstanding balances of each type of account at the end of each day shall not exceed a limit of THB300 million per non-resident, which includes balances of all accounts opened by each non-resident with all financial institutions in Thailand.

Overview of Corporate Bonds

The infrastructure and process of corporate bond transactions is just like that of government bonds.

Trading

OTC MarketCorporate bonds are mostly traded in the OTC market.

Exchange MarketExchange trading for corporate bonds takes place in BEX.

CCP

CCP for the OTC MarketThere is no clearing function in the OTC market.

CCP for the Exchange MarketTCH is the CCP in the exchange market for corporate bonds.

Bond Settlement

Corporate bonds are settled via PTI in TSD on an RTGS basis.

Cash Settlement

Cash settlement of corporate bond transactions takes place in BAHTNET.

Interest Payment and Redemption

Interest Payment and Redemption of Government Bonds

Most bonds pay interest on a semi-annual basis. Interest is calculated on a 365-day basis (366-day basis in a leap year). Withholding tax is deducted at the source (Figure TH04).

Interest Payment and Redemption of Corporate Bonds

Interest payment and redemption of corporate bonds is same as that of government bonds. In addition to the rules for government bonds, for a corporate bond registered with BMA the interest is paid on the same date every year. In the event that the interest payment date is on a bank holiday, the interest is paid on the next business day, but the number of days in the interest calculation is unchanged and interest is calculated up to the interest payment period. The last interest payment is made on the maturity date. If the maturity date is a bank holiday, the payment is made on the next following business day and the additional interest is calculated on a daily basis.


Typical Business Flow

DVP Flow of Government Bonds for Domestic Trades

The business flow in Thailand for government bonds is analyzed by means of comparison with a typical DVP flow. Key findings of the analysis are described below.

(i) Pre-Settlement Matching Pre-matching is mandatory and carried out

between the counterparties via telephone and TSD, although there is no distinct system for pre-settlement matching.

(ii) Bond Settlement The matching and book-entry system, under

PTI, is used by TSD. PTI does not receive any instruction from other systems, such as a pre-settlement matching system or trading system, while the sell side and buy side

input trade details into PTI. After receiving trade details from the sell side and buy side, TSD performs central matching and sends settlement confirmation to both sides.

TSD adopts DVP Model 1 of the BIS definition for government bond settlement. If trade details from both sides are matched, TSD holds bonds within PTI. Then TSD sends cash settlement details to BOT.

(iii) Cash Settlement After receiving settlement details from TSD,

BOT conducts cash settlement. BOT does not need to reconfirm for cash settlement by the sell side or buy side as they have already authorized TSD to send the money settlement instruction on their accounts. After cash settlement, BOT sends settlement confirmation to both sides of the trade (Figure TH05).

Figure TH04: Interest and Redemption Payment Process

RegistrarParticipant

1

Send notifications (at least 14 days)

Send the announcement out immediately

Book closing date participants submit the shareholder list

to TSD system

2

4 3

Book closing date + 1 day TSD system collect the data and send out the

entitlement list to registrar

Payment made to the investors

5

InvestorsSource: Stock Exchange of Thailand (SET).


Figure TH05: DVP Settlement

For further details, please refer to Part 3 TH03 (Government Bond Transaction Flow for Domestic Trades).

DVP Flow of Corporate Bonds for Domestic Trades

Typical corporate bond transaction flows are just like those for government bond flows.

For further details, please refer to Part 3 TH04 (Corporate Bond Transaction Flow for Domestic Trades).

DVP Flow of Cross-Border Bond Transactions

The Thai baht is freely convertible for SPOT value. FX against baht for all other value dates requires proper underlying transactions. Offshore FX trading for investment is allowed for all investors. Foreign investors are also not subject to any restrictions on pre-funding, third-party FX, and repatriation. Regarding FX reporting, any payments made from or received into accounts from residents THB account requires proper documentation support. In terms of overdraft and cash balances for non-residents, foreign investors have an end-of-day limit of THB300 million for each type of account (NRBS and NRBA). Overdrafts for non-residents are allowed, but BOT does

require the foreign investor to sign an overdraft agreement with the onshore commercial bank prior to having the credit facility in place.

For further details, please refer to Part 3 TH05 (Bond Transaction Flow for Foreign Investors OTC Market / DVP).

Interest Payment and Redemption of Government Bonds

Business flows of interest payment and redemption in Thailand are analyzed using a typical flow. Key findings of the analysis are given below.

(i) Paying Agent (PA) For government bonds, BOT is appointed as

the PA for MOF. BOT requests payment for an issuer, receives a record book of bond-holders from TSD, calculates interests, and conducts interest payment and redemption on behalf of the issuer.

(ii) CSD There is a designated central securities

depository (CSD) called TSD for government bonds in Thailand that has no banking license and no account with BOT.

Cash AccountsBank 1 Bank 2

Securities Accounts

Bank 1 Bank 2

Confirmation

Securities transfer Cash transfer

Request Payment

Source: Bank of Thailand

DVP-Model 1


(iii) Payment Flow Central bank cash settlement system is used

for interest payment and redemption, and a commercial bank is used as cash settlement infrastructure. Central bank money is more secure than commercial bank money.

(iv) Tax Thailand imposes withholding tax on

interest for both resident and non-residents. BOT withholds income tax on behalf of the issuer (MOF).

(v) Other Issues BOT as a PA does not notify CSD participants

of interest payment and redemption in advance.

For further details, please refer to Part 3 TH06 (Interest Payment Flow of Government Bond) and Part 3 TH07 (Redemption Payment Flow of Government Bond).

Interest Payment and Redemption of Corporate Bonds

The typical flow of corporate bonds is the same as for government bonds.

For further details, please refer to Part 3 TH08 (Interest Payment Flow of Corporate Bond) and Part 3 TH09 (Redemption Payment Flow of Corporate Bond).

Message Standard

Message Format

TSD adopts ISO15022.

Message Items

Regarding the 10 common elements of settlement instruction and confirmation defined by the Securities Market Practice Group (SMPG), TSD has same message items as ISO15022 for MT543 and MT545.

Market Practice

Operating Hours

The CSD in Thailand, TSD, opens at 7:00. The cut-off time is 17:00 and closing is at 20:30.

Settlement Cycle

Although the bond settlement system can be on real-time basis, most market participants settle OTC bonds on a T+2 basis. In addition, bond trading in BEX is also settled on T+2. In the case of an investor from the US, the settlement cycle for OTC bonds is T+3.

Fails

For bond trading in BEX, if a transaction fails to settle on T+2 since a sell side’s broker account with TSD is short of bonds, the transaction settles only in TSD’s books with no real securities transferred. Therefore, the buy side’s account is credited and the sell sides’ account debited, which causes a pending securities. In the early afternoon of T+2, TCH immediately tries to borrow the securities on behalf of the sell side’s account. If successful, no penalty is levied and the failing party only takes over the borrowing charges. If it is not successful, TCH tries again to borrow securities at the end of T+2. If successful, a “one day late” settlement penalty is levied and the sell side must bear borrowing costs. If a second borrowing attempt fails, the broker has time to regularize its position until 10:30 on T+3. If the account is still short after that time, TCH enforces a mandatory buy-in with same day settlement.

In the case of T+3, the buy-in price is the previous closing price or last bid plus five spreads (whichever is higher). In the case of T+4, the buy-in price is the previous buy-in price, closing price, or last bid price plus two spreads, whichever is higher.

The executed buy-in transaction is settled on the same day in the net clearing system between 13:30 and 14:15.


Buy-in procedures are rarely applied, since pre-matching is mandatory on SD–1 and counterparties are unlikely to match trades without having the relevant securities in their account. Penalties for late deliveries are detailed in Figure TH06.

The minimum penalty amount applied is THB300 per security per occurrence. In addition, SET also imposes a penalty on the broker for late settlement as outlined in Figure TH07.

At the Thai Bond Dealing Center, for a failed payment, a penalty of a maximum of twice the payment amount may be considered. For a failed delivery, a penalty at a rate of 5% of the value of the securities may be considered.

Bilateral Netting

A multilateral netting model for clearing and settlement for securities trading is applied in BEX, Market Alternative Investment (MAI), and SET. Thus, not all OTC bond trading uses a multilateral netting model.

Numbering and Coding

In Thailand, there is one CSD, TSD, for government bonds and corporate bonds. This section describes the numbering and coding schemes of TSD.

Numbering and Coding for the OTC and Exchange Markets

Securities Numbering

ISIN is used for bond trades. However, local numbering is also used.

Financial Institution IdentificationBIC is used for financial institution identification. However, a proprietary code is also used

Figure TH06: Penalties for Late Deliveries

Source: Thailand Clearing House Co., Ltd.

Figure TH07. Penalty on the Broker for Late Settlement

Source: Thailand Clearing House Co., Ltd.


Securities AccountThe security account structure is an omnibus type and multi-layer. TSD participants manage bonds separately from their own bonds and customer’s bonds in CSD. ISO20022 has not been adopted in Thai bond market. A settlement system uses proprietary account numbers to transfer bonds.

Cash AccountThe International Bank Account Number (IBAN) is not used. Since market participants are banks and the fund is settled via BOT, participants use a BOT account number as a reference to transfer funds.

Character Code and LanguageSWIFT format is used as the character code for bond and cash instructions. English is adopted as the standard language for payment systems.

Medium- to Long-Term StrategiesCurrently, STP is being implemented for bond transactions. Most bonds are traded in the OTC market. After entering data into the PTI of TSD, the data are processed automatically without significant manual intervention, except necessary affirmation. As such, the domestic bond settlement process is sufficiently automated.

Regarding cross-border trade, messages are compliant with ISO15022 and have a high likelihood of being processed with less manual intervention by custodians. Adoption of ISIN and BIC may have some advantages in directly connecting with other CSDs in the near future.

In the very near future, both government and corporate bonds will be listed on BEX. While only publicly listed companies’ bonds are currently allowed to trade on BEX, non-listed companies will soon be able to have their bonds traded on the exchange as well. However, there is not yet an electronic trading platform. In 2010, BMA signed

a multilateral memorandum of understanding with four key authorities—BOT, the Public Debt Management Office, SET, and SEC—to establish the Thailand Financial Instruments Information Center (TFIIC), an infrastructure project under the Capital Market Development Master Plan 2009–14. TFIIC will centralize storage of financial instrument data and information for public access and cross-agency sharing within domestic financial markets (Figures TH08, TH09, TH10).

ReferencesAsian Development Bank (ADB). ASEAN+3 Bond

Market Guide.

ADB. AsianBondsOnline. http://www.asianbondsonline.adb.org

Executives’ Meeting of East Asia Pacific Central Banks. Payment, Clearing, and Settlement Systems in Thailand.

Note: Some parts in this report are quoted from sources, such as the above references, and the websites of bond market infrastructure operators.


Figure TH08: TFIIC Implementation Framework

A. Obtain Political Will

B. Establish and Mandate Collaborative Task Force

C. BusinessArchitecture

D. Harmonize Data and Standardize Code

E. Solutions and Technology Architecture

F. Migration Planning

G. Implementation

Governance

H. Change Management

98

TFIIC

Vision and Scope

Source: Bank of Thailand.

Figure TH09: Benefits from TFIIC

Promote competition in the Thai capital

market and build links with global market

systems

Reduce data management cost and

redundancy of securities data

Improve monitoring capability and effective

development of capital market

Provide corporations and investors with

adequate information for making reasonable

decisions

TFIIC



Figure TH10: TFIIC Architecture Overview)

Data Manager

Data Provider

Data Consumer

Data Acquirer

http://WWW.TFIIC.ORG

Public UserPremier User

Founding Members

Registry Informationand Involved Party

SecuritiesTransaction Data


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